Iranian oil: Getting too hot for tanker owners?

Domestic tanker owners seem to be optimistic that the Government will find a way to insure vessels carrying Iranian oil, if the Europe-based Protection and Indemnity (P&I) insurers withdraw their cover. Their confidence stems from indications that New Delhi will provide sovereign guarantee to Indian ships that carry Iranian crude.

Following European Union sanctions on Iran over its nuclear plans, the International Group of P&I Clubs, which insure more than 90 per cent of the world's tanker fleet, intimated ship owners that they would not extend cover to shipments of Iranian crude contracted after January 23. All the existing contracts are also required to be completed before July 1. Last month, Shipping Corporation of India was forced to cancel a shipment of Iranian crude oil to Indian Oil Corporation as its tanker was denied P&I cover.

This could be an isolated instance, but if the P&I insurers go ahead with their decision, Indian tanker owners need to have alternative insurance to carry Iranian crude. P&I clubs provide insurance cover for third-party liabilities, which include a carrier's liability to the owner of a cargo for damage to the cargo, the liability of a ship in case of collision, and against environmental pollution. The issue of sovereign guarantee was reportedly discussed at a meeting between ship owners and the Shipping Ministry officials last week. Apparently, China, another large importer of crude oil from Iran, is considering sovereign guarantee to its P&I club to cover vessels carrying Iranian crude oil. Indian tanker owners expect a similar gesture from the Government here.
Solutions

Will the sovereign guarantee solve the problem fully? Some analysts believe this could be a partial solution. Currently, Indian carriers account for only about 17 per cent of imported oil cargo. The balance is carried by chartered foreign tankers. Will the Indian Government's guarantee be extended to these vessels too?

Mr S. Venkateswaran, a leading maritime lawyer, says if the Government can provide sovereign guarantee to a ship owned by an Indian company, the same facility can be extend to a vessel chartered by the same company. According to an analyst, if EU sanctions get fully implemented, it could trigger a chain reaction with massive impact. For instance, if a ship violates the sanctions and picks up Iranian cargo, the P& I club could stop its cover to other ships of its owner, possibly going to other destinations. An Indian shipping company official termed this view as far-fetched. An alternative suggested is purchase of crude oil on c.i.f. basis. This not only works out costly for Indian refiners but the Iranian seller of crude oil will also find it equally difficult to arrange shipments. Besides, buying on c.i.f. basis is against India's policy of buying crude oil (on f.o.b. basis) to ensure energy security, said Mr Sunil Thaper, Director, Tanker and Bulk Carriers, Shipping Corporation of India.

He added, “Transportation of crude is an important component of energy security. So, buying crude on c.i.f. basis cannot ensure long-term energy security.”

India currently imports about 3 lakh barrels of crude oil from Iran daily — accounting for 11 per cent of crude oil imports or about 18 million tonnes annually. Iran is India's second largest supplier of crude. Of late, Indian refiners have been looking to increase supply from other countries, including those in West Africa. However, this could push up freight cost. Shipment from Iran to India takes only 4 to 5 days to reach the West coast, but from West Africa it could take 15 to 18 days, said an oil industry analyst. Fortunately, the tanker freight rates continue to be weak, and will to some extent cushion the impact of this potential increase in freight cost.
Govt, cos lack a plan

India imports about 70 per cent of its crude oil requirements and a large part of it is carried by foreign flag vessels. The share of Indian ships has been dwindling year after year. Yet, there has been no plan to increase tonnage and acquire the type of tankers required by Indian oil companies. Things have not progressed beyond talks on a transport policy for the hydrocarbon sector: it remains on paper since the country deregulated import of crude oil in the 90's.

Indian oil companies, too, haven't done enough to secure oil transport security. According to an analyst, oil companies have failed to scale up their own tonnage by buying tankers or taking them on time charter. Indian Oil Corporation, which roughly spends around $500 million a year on freight in a strong shipping market, has just two very lage crude carriers (VLCCs) on time charter, causing huge spot exposure on the freight transport side. Bharat Petroleum Corpopration Ltd also has a pretty decent-sized spot exposure, while Hindustan Petroleum Corporation Ltd has contract of affreightment (CoA) deals with Shipping Corporation of India for getting cargoes delivered. Similarly, Mangalore Refinery and Petrochemicals Ltd imports under an annual CoA. Private refiner Reliance has five VLCCs on time charter and Essar owns two.

In comparison, Japanese refiners have 80 per cent of their crude oil requirement moving on their fleet under time charter. Sixty five percent of China's crude oil cargo moves on its own tonnage. India has more than 70 per cent of its crude oil cargo moving on foreign tonnage. So much for our oil-security planning.

Copyright © 2012, The Hindu Business Line.